GAO Report Offers More Clarity

April 1, 2009

Authored by: Robert Klingler

On March 31, 2009, the Government Accountability Office released its March 2009 report on TARP, as well as an accompanying statement.  Highlights of the report include almost 2,000 applications still being processes for the TARP Capital Purchase Program, another breakdown of how Treasury is spending the TARP funds (including an apparent 45% reduction in TALF), and a little more guidance on the applicable executive compensation limits.

TARP Capital Recipients and Applications

As of March 27, 2009, 272 publicly held institutions, 248 privately held institutions and 12 community development financial institutions had received TARP Capital Purchase Program funding.  Treasury was still in the process of reviewing approval recommendations for 1,190 qualified financial institutions, and more than 750 applicants were still being viewed by the federal bank regulators.  More than 250 financial institutions have withdrawn applications, and no applications have been formally denied by Treasury.

Dividend Payments (and Non-payments)

The Treasury had received almost $2.9 billion in dividend payments through March 20, 2009 (which probably explains the $2.9 billion discrepancy in TARP funds remaining).  AIG did not declare or pay the $733 million due on its preferred stock, however the dividends are cumulative and AIG and Treasury are working on a broader restructuring of AIG’s assistance.  In addition, eight banks did not pay dividends under their TARP preferred stock.  For stand-alone banks, unlike bank holding companies, the TARP Capital Purchase Program investment is in the form of non-cumulative dividends.  As a result, the only impact of not making the dividend payments is a prohibition on paying dividends on any junior stock (such as the common stock) and, if no dividends are made for six quarters, the holder of the preferred securities have the right to appoint two directors.  The eight banks have informed Treasury officials that they did not have the necessary regulatory or shareholder approval to declare dividends on their preferred stock, although six of the banks have stated their intent to seek the necessary approvals.

Treasury’s Use of TARP Funds

The report also provides the Treasury’s calculations of how the TARP funds have been, and will be, used.

Expenditures under TARP

In contrast to our prior estimates, the Treasury estimate: (a) assumes a total of $218 billion to be spent under the TARP Capital Purchase Program; (b) includes $7.5 billion in asset guarantees provided to Bank of America; and (c) reduces the total TALF investment to $55 billion from $100 billion.  No further explanation is made as to the apparent 45% reduction in TALF investment, and the report still states that Treasury may provide up to $100 billion in TARP funds to support up to $1 tillion in purhase of consumer and business lending.  (The discussion also notes that Fannie Mae and Freddie Mac will be contributing a total of $25 billion to the Making Home Affordable program, thus raising the total program to $75 billion.)  Factoring in $25 billion in anticipated TARP CPP redemptions, Treasury would have approximately $134.6 billion remaining under TARP.

Executive Compensation Guidelines

According to the report, Treasury is planning to implement its guidelines as announced in its February 4, 2009 press release and the provisions of the American Recovery and Reinvestment Act of 2009.